By Scott Bradley, Esq., Gallivan White & Boyd
On January 7, 2011 the SC Supreme Court issued its opinion in the matter of Crossmann Communities of North Carolina, Inc. v. Harleysville Mut. Ins. Co., Op. No. 26909 (S.C.Sup.Ct. filed Jan. 7, 2011). As you may be aware, the ruling created a significant change in the law with respect to the potential obligations of insurance companies to provide a legal defense and indemnity to builders and contractors for construction defects under a commercial general liability (CGL) policy of insurance. The Crossmann case involved alleged property damage to a condominium project resulting from ongoing and continuous water intrusion caused by allegedly improper siding installation.
In plain terms, the Court in Crossmann ruled that where the property damage at issue “is no more than the natural and probable consequence” of the faulty workmanship, it does not constitute an “occurrence” necessary to trigger coverage under a CGL policy. The Court reasoned that water intrusion is just such a consequence of faulty siding installation, thus, it did not constitute an occurrence. No occurrence means no coverage, whether the faulty workmanship was performed by you or a sub-contractor. The Court’s opinion is not limited to water intrusion.
While faulty construction was not considered an occurrence under the pre-Crossmann law, the resulting damage to non-defective components of the construction was. Under the previous caselaw, using the facts of Crossmann, there would have been no occurrence/no coverage for the faulty siding installation, but the damage to the remaining parts of the structure from the resulting water intrusion would constitute an occurrence and trigger coverage. That was significant in that it would not only provide coverage for the policyholder for the resulting water damage, but would also trigger the duty of the carrier to provide a legal defense. In the vast majority of the construction defect scenarios, however, that is no longer the case. In most construction defect situations, the builder or contractor will be left totally exposed, as the insurance carriers should be able to rely on the Crossmann decision to conclude that the defective work and any resulting damage no longer constitutes an occurrence under the law in SC. As noted above, when there is no occurrence there is no coverage or duty to defend.
It should be noted that the final word on Crossmann has not yet been written. There will be a re-hearing of the case in front of the SC Supreme Court. Additionally, there have been bills introduced in both the SC Senate and the House of Representatives seeking to legislatively define “occurrence” in a manner that would provide coverage to builders and contractors for construction defects in certain situations. The ultimate success or failure of the re-hearing or legislative process is unknown.